While the Legislature faces the inevitable song and dance of balancing its budget, some cities have found a contentious way to generate revenue that has lawmakers worried. Any tax on utility service by a city in excess of 6% is not a utility tax, is not authorized by law and is not capped like a true utility tax.
Under state law, cities are authorized to impose a utility tax on electric, gas and telephone services of up to six percent, which almost all cities do. But no state law explicitly authorizes a tax on water and sewer services. Still, a growing number of cities — particularly in Eastern Washington — have been applying “utility taxes” to water and sewer services. Unregulated, the rates have crept to unprecedented levels across the state.
“A variety of cities have used the tax in a variety of ways,” says Attorney Andrew Maron, who has represented numerous local government interests on municipal tax issues. “But there is no cap on this. There’s a cap on electric and telephone services, but not on this (water and sewer services). And that has a number of legislators concerned because utility taxes are the most regressive there is.”
Selah, Washington, just north of Yakima, for instance, is considering raising its utility tax from 21 to 29.5 percent. City officials claim revenue generated from the hike would fund much needed fire and police equipment. Last month, Kelso, Washington voted to approve a two-percent increase to the city’s B&O tax on water, sewer and solid waste utilities, raising it from eight percent to ten percent. Closer to home, SeaTac is currently considering imposing a six percent tax.
But such taxes have questionable implications for special purpose districts.
“Are they businesses or not?” asks Maron. “From the local government stance…government shouldn’t have the power to tax other governments.”
He points to a recent court case. For many years, since the 1960s, the city of Wenatchee had been imposing taxes on their water utility districts (PUD). When the rate reached 16 percent, Chelan PUD challenged the city’s authority to tax local government. But the court case, City of Wenatchee v. Chelan Public Utilities District, settled earlier this year, ruled otherwise.
While there is no statute authorizing cities to levy taxes on water or wastewater, cities have the power to do so under their business and occupation taxing authority. These “utility taxes” are technically B&O or excise taxes. And some cities have felt emboldened to hike rates recently, says Maron.
In 2012, tax rates for water sewer and garbage reached 36 percent in Granger, 20 percent in Port Townsend, 18 percent in Davenport and 33 percent in Wapato, south of Yakima.
Lawmakers and critics, question why a tax that hasn’t been statutorily authorized has no limit, while telephone, electricity and natural gas do. Others claim cities haven’t been forthcoming about hikes in utility tax rates.
Though Maron says he’s not aware of any planned legislation to address the issue, lawmakers are taking notice. Last week, the Washington State Association of Counties presented to the House Finance Committee, several ideas for revenue generators, among them a six percent county utility tax levied on unincorporated areas and estimated to net $154 million.
“The court analyzed this…and affirmed what Wenatchee and other cities are doing. But you look [at these numbers] and you’re blown away by the tax levels cities have adopted,” said one source, an attorney who requested anonymity. “At the same time, they’re bemoaning their lack of revenue authority.”
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